Toronto District Heating Corporation

The Strategic Policies and Priorities Committee recommends the adoption of the following report (September 18, 1998) from the Chief Administrative Officer:

Purpose:

The Toronto District Heating Corporation (TDHC) is proposing that it become a corporation regulated by the Ontario Business Corporations Act (OBCA). TDHC advises that the Province is prepared to include amendments to Bill 35, the proposed Energy Competition Act. A very narrow timeframe exists to take advantage of this opportunity and its potential benefits. This report recommends that Council endorse the TDHC approach to change its legal status and identifies minimum conditions under which the City is prepared to participate. Longer-term negotiations among the partners of the TDHC will be required to resolve outstanding issues and to effect any change to its legal status. Assurance will be sought from the Province that it will not proclaim the relevant legislation concerning TDHC into law at the same time as the rest of Bill 35.

Funding Sources, Financial Implications and Impact Statement:

There are no new financial implications associated with the recommendations of this report. As determined by the former City of Toronto, an independent financial assessment and valuation of City assets will be required and will form the basis of subsequent negotiations. In turn, negotiation will take place among the TDHC partners to reach a shareholder agreement subject to formal approval by each of the respective parties.

Recommendations:

It is recommended that:

(1)Council endorse the request by the Toronto District Heating Corporation that Bill 35, the proposed Energy Competition Act, include provisions which permit the Toronto District Heating Corporation to be changed to one with share capital regulated under the Business Corporations Act (Ontario);

(2)The Minister of Energy, Science and Technology and the Minister of Municipal Affairs be requested to confirm in writing to the City that the amendments to Bill 35 respecting the Toronto District Heating Corporation will not be proclaimed into law until such time in the future that an agreement among the proposed shareholders has been reached and the Province has been so notified in writing by the City;

(3)the Commissioner of Finance and Treasurer, in conjunction with the City Solicitor and the Commissioner of Works and Emergency Services, be authorized to negotiate an agreement on behalf of the City of Toronto with representatives of the other proposed stakeholders of the proposed Corporation, namely the University of Toronto, the Province of Ontario and the hospital group;

(4)the Commissioner of Finance and Treasurer, in conjunction with the City Solicitor, identify the conditions that must be addressed to the satisfaction of the City including financial valuations, impact analyses, investor interest and other factors, and submit any final proposed agreement to Council for its approval; and

(5)the appropriate City officials be authorized to take the necessary action to give effect thereto.

Council Reference and Background:

At its meeting of February 26, 1998, the Special Committee to Review the Final Report of the Toronto Transition Team requested the Chief Administrative Officer (CAO) to:

(a)obtain a valuation of the City's assets currently utilized by the TDHC;

(b)report to the Special Committee, in conjunction with the CFO and the City Solicitor, on the governance of the TDHC and potential City position on future governance and related issues; and

(c)report to the Special Committee, in conjunction with the Commissioner of Emergency Services and Works, on the City's road allowance and other City property used for the purpose of district cooling distribution pipes.

The process for which the TDHC is seeking endorsement will commence the resolution of outstanding issues with the City and is compatible with the directives to the CAO.

Comments and Discussion:

(a)Overview of the TDHC:

The current TDHC was created as a separate corporate entity by statute, the Toronto District Heating Corporation Act, in 1980. It was preceded by the Toronto Hospitals Steam Corporation Act from 1968 to 1982 and has as its objectives the construction and operation of steam plants and a steam distribution system to supply users. TDHC has, approximately, 110 commercial customers. The City does not own TDHC and the Corporation is not deemed to be a local board of the City except for the purposes of the Ontario Municipal Employees Retirement System.

As set out in the Act, a ten member Board of Directors oversees TDHC. Of the members, four are appointed by the City of Toronto, with two appointed by each of the Province, the Hospital group (five organizations) and the University of Toronto. The Chair must be elected from among the City appointees. The remuneration and expenses for the directors are recommended by the Board and are subject to approval by the City. The Board has the power to make by-laws governing its proceedings and to generally deal with the management of the affairs of the TDHC.

The Act permits TDHC to borrow money in two ways only. The first type of borrowing may be from a chartered bank or other person, must be for use with respect to current expenditures only and must be repaid within one year. In addition, the City must give its permission before any such loan can be obtained. The second type of borrowing permitted may be from the City itself. This arrangement can be made without the aforementioned restrictive conditions attached to it. As well, the City is authorized to provide funds to TDHC to permit it to carry out its objectives on such terms and conditions as the City may determine.

(b)Proposal to Incorporate under the Business Corporations Act (Ontario):

The TDHC wishes to be able to hold and issue shares, generate working capital, realize profit and expand its business associations. Under its current legislation, the Toronto District Heating Corporation is severely limited in this regard. Neither the former, or new, City of Toronto has pursued the possibility of a new legal status for the TDHC through incorporation under the OBCA. Accordingly, the viability and impact of the current TDHC proposal require assessment from a new perspective while taking into account previous directives and analyses.

(c)Conditions for City Participation:

There is an immediate need for the TDHC to take advantage of the opportunity presented to it by the Province to pursue a change in its corporate status. Endorsement by the City for the submission of amendments to Bill 35 creating OBCA status for the TDHC is recommended, but will be only the first of several decision-making stages. Rigorous negotiations and decisions will be required among all TDHC partners subject to the results of ongoing financial valuations, impact analyses, investor interest and other factors.

In order to protect its financial and other interests, the City must establish the conditions under which it is prepared to participate in negotiating a potential shareholder agreement with the other partners of TDHC. Assuming that the Province makes the amendment to Bill 35, thus setting the stage for negotiations to commence among the partners of TDHC, the following issues must be addressed to the satisfaction of the City. At this very early point, they constitute the minimum conditions for ongoing City participation:

(a)clarifying the nature, legal obligations and alternative methods of payments made by TDHC to the City;

(b)ensuring that City contributions are fully recognized and that reasonable consideration of all financial and in-kind contributions occurs;

(c)ensuring that the contributions considered take into account present value, outstanding amounts owed and/or uncompensated contributions made;

(d)clarifying the title to property and other assets of the integrated infrastructure;

(e)developing details on such matters as the respective rights of the parties and, the rights of first refusal rules for shares tendered by any individual original owner;

(f)submitting to the Province with regard to the above points, specific conditions before permitting any change to the TDHC corporate status or the TDHC Act; and

(g)requesting the Province to ensure that no change to the TDHC corporate status or the TDHC Act shall occur until formally notified of the express approval of the City of Toronto.

Conclusion:

TDHC wishes to position itself to take advantage of significant potential social, economic and operating benefits that it believes would result if it were incorporated under the Business Corporations Act (Ontario). The Province of Ontario has indicated that there is an opportunity to piggyback on Bill 35, whose third reading is imminent.

The TDHC requires endorsement from its partners of its intent to seek status under the OBCA. It also requires the partners to enter into a series of steps resulting in negotiations around independent findings pertaining to asset, value, equity, and debt, as well as governance matters. In this regard, the City of Toronto wishes to ensure the utmost protection of City and public interests, as well as to mitigate risk while taking advantage of the opportunities presented.

Staff from the Chief Administrator's Office consulted with the Finance Department, the Legal Department and the Works and Emergency Services Department in the preparation of this report. The Works and Emergency Services Department has separately prepared a report specific to its operations and outlines the benefits it perceives accruing to the City should the TDHC eventually obtain status under the Business Corporations Act.

The Strategic Policies and Priorities Committee also submits the following report (September17,1998) from the Commissioner of Works and Emergency Services:

Purpose:

The purpose of this report is to support the recommendations made in the Chief Administrative Officer's report by identifying some of the benefits of the proposal from the perspective of Works and Emergency Services.

Funding Sources, Financial Implications and Impact Statement:

There are no direct funding implications of this report.

Recommendations:

It is recommended that this report be received for information.

Council Reference/Background/History:

A proposal was received from the Toronto District Heating Corporation on September 15, 1998 addressed to the Clerk of the City of Toronto. Staff of the Works and Emergency Services Department have met with representatives of Toronto District Heating Corporation to discuss the proposal.

Comments and/or Discussion and/or Justification:

For reasons outlined below, Works and Emergency Services is supportive of the proposed changes that will enable the TDHC to become an Ontario Business Corporation in order to expedite development of the district energy potential across the new City of Toronto.

In general the changes will give TDHC the financial tools to implement significant district energy projects which will improve both the local economy and the environment. In particular, TDHC will be able to implement deep lake water cooling, a project that develops a local environmentally sustainable cold energy resource here in the City. TDHC will be in a position to focus on its core business of district energy systems. The new TDHC will have the tools to implement energy savings projects to reduce the impact of increasing air pollution from the generation of electricity using fossil fuels. TDHC will be able to move quickly to implement Deep Lake Water Cooling, which will require the least electrical energy for building cooling of any major proposal to date.

Water Supply

By implementing Deep Lake Water Cooling, TDHC will offer the City significant benefits in the Water Supply.

As indicated in a report dated August 28, 1998 to Works and Utilities Committee from the General Manager, Water and Waste Water Services, deep cold water will likely preclude taste and odour in the water supplied through the new intake at the Island Filtration Plant and thereby help to prevent future taste and odour occurrences.

A deep intake location is expected to reduce the costs of zebra mussel control.

A deep location will be less subject to variable levels of sediment and turbidity and would thereby help to optimize water treatment plant operation.

The feasibility of extending intakes of the Harris, Horgan and Clark plants will be reviewed in addition to the proposed intake at the Island Plant. The intake at the Island Plant would supply deep cold water for district cooling by TDHC.

The change in corporate status of TDHC would facilitate the funding and expeditious implementation of Deep Lake Water Cooling, which in turn would benefit the Water Supply. TDHC has offered to provide a new intake at the Island Filtration Plant at no cost to the water rate payer or the tax payer. The estimated value of that contribution would be approximately 28 million dollars. TDHC must arrange funding and is proposing the new corporate status to enable TDHC to accomplish the best possible funding arrangements.

With respect to City property, the City would retain ownership of all lake water cooling facilities that carry City Water. By retaining ownership of the water infrastructure the City would maintain control for operations and quality control purposes.

An agreement is being prepared between the City and TDHC for the delivery of cold water to the district cooling system operated by TDHC.

Carbon Dioxide Reduction and Air Quality Improvement

The first phase of Deep Lake Water Cooling would reduce carbon dioxide emissions by approximately 30,000 tonnes per annum by reducing electricity consumption for building cooling. Reducing electricity consumption will reduce fossil fuel air emissions from coal fired generating stations of Ontario Hydro. The Lakeview Generating Station just west of the City on the shore of Lake Ontario is scheduled to increase production and coal burning as a result of reduced production from nuclear powered generating stations. Lake Water Cooling will help to mitigate the increase and improve City air quality.

Depletion of the Ozone Layer

Existing air conditioners in buildings would be replaced by the deep lake water cooling source and CFC refrigerants could be taken out of service preventing further leakage to the upper atmosphere. CFC's are contributing to the thinning of the ozone layer and the increase in UVA and UVB rays reaching the earth's surface. Increased UVA and UVB are contributing to higher risk of skin cancers.

Co-generation

Co-generation is the term used to describe the production of both heat and electricity from the same generating equipment. Co-generation increases energy efficiency substantially (from 33 percent to 90 percent) and reduces emissions of carbon dioxide and other air pollutants. A number of large co-generation projects have recently been announced in Ontario and Alberta, one 525 megawatt plant being planned for a major industrial area in Sarnia, Ontario. York University here in Toronto recently installed a co-generation plant to supply both electricity and heat efficiently to its buildings. The fuel savings from co-generation enhances its cost effectiveness. Co-generation would be a natural development for downtown Toronto in connection with TDHC heat production. It would also reduce potential future major expenditures on additional transmission line capacity from more remote generating stations.

The potential waste heat available to heat buildings in the City is significant. The waste heat produced to make the electricity consumed in the City economy approximates the same magnitude as the Hybernia resource. It is recognized that past commitments by Ontario Hydro to build remote generating stations have resulted in the waste heat not being available for beneficial use. However, future expenditures on refurbishing remote stations should not be made without looking closely at the local co-generation option which brings the waste heat close to the heating market.

A report on the potential for district energy in Toronto, presented to Metro Toronto Council in 1995, identified viable district energy projects centered on clusters of high density development located across the new City. District energy is the term used to refer to both heating and cooling systems. The report was adopted as Clause No. 3 of Report No. 13 of The Environment and Public Space Committee by Metropolitan Toronto Council at its meeting held on July 5 and 6, 1995.

Conclusions:

Changing status of TDHC will expedite development of deep lake water cooling, a sustainable energy resource in the City of Toronto. It will also position TDHC to fully develop the potential of district energy in Toronto which will be supported by proposed changes under Bill 35 to allow local co-generation. The Water Supply will receive, at no cost to the City, a new intake with estimated cost of approximately $28 million according to TDHC. Air quality and energy efficiency in the City will be improved substantially. Local employment will result from the development of district energy. District Energy will benefit the local economy by circulating energy dollars locally rather than sending energy dollars out of the country.

The City of Toronto would achieve significant reductions in carbon dioxide and sulphur dioxide emissions to help achieve its CO₂ reduction target and the national target proposed under the Kyoto protocol.

Contact Name:

Kevin Loughborough, P. Eng., Works and Emergency Services

Telephone (416) 392 8845

Fax (416) 392 2974

email: kevin_t._loughborough@metrodesk.metrotor.on.ca

The Strategic Policies and Priorities Committee also submits the following communication (September15,1998) from Mr. Juri Pill, President and CEO, Toronto District Heating Corporation:

On August 28, 1998, the board of directors of the Toronto District Heating Corporation resolved to seek a change in TDHC's status of the kind the provincial government is requiring be made to Toronto Hydro on passage of Bill 35, the Energy Competition Act, 1998. The essence of the proposed change is conversion from a corporation without share capital to a corporation with share capital regulated by the Business Corporations Act (Ontario).

The Ministers of Energy, Science and Technology and Municipal Affairs have agreed to the inclusion of appropriate amendments to Bill 35 at the third reading stage, due in November, provided the stakeholders in TDHC indicate their agreement with the proposed change, preferably by September 21. Another opportunity to change TDHC's status may not arise for several years.

The purpose of this letter and attachment is to request that the City of Toronto, as one of TDHC's stakeholders, indicate its agreement with the proposed change in corporate status, and with the proposed process for adjustment of the financial and other contributions made by the proposed shareholders in respect of THDC. This process would involve a shareholders' agreement to be reached between third reading of Bill 35 and its proclamation into law. The shareholders' agreement would also address other aspects of the operation of the corporation.

Because of the time element, I would be pleased if every effort could be made to have City Council consider TDHC's request at its meeting on October 1-2. We have worked closely with City officials in the preparation of the attached material and understand that our request can be considered first by the Strategic Policies and Priorities Committee at its meeting on September 24.

TDHC requests specifically that the Committee ask City Council to adopt the three recommendations set out on Page 8 of the attached material.

I want to thank you in advance for your cooperation in processing this matter in a timely manner.

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(Attachment dated September 15, 1998, appended to

the foregoing communication, addressed to

City Council, from the Toronto District

Heating Corporation titled, "Request for endorsement

of a proposed change in TDHC's corporate status)

Purpose of this report:

The Toronto District Heating Corporation (TDHC) is a statutory corporation created in 1982 at the initiative of the former City of Toronto. It is governed by The Toronto District Heating Corporation Act, 1980. The City of Toronto has a continuing financial relationship with TDHC and owns some of the infrastructure it uses. The City appoints four members of the ten-person board of directors of TDHC.

TDHC is seeking to change the corporation's legal status from that of a corporation without share capital to that of a corporation with share capital incorporated under the Business Corporations Act (Ontario). TDHC requests that City Council endorse the proposed change.

There is an opportunity to make this change as an amendment during third reading in the Ontario Legislature of Bill 35, the proposed Energy Competition Act, 1998, due to occur in November 1998. The provincial government has indicated its agreement to such an amendment provided the organizations represented on TDHC's board of directors agree. Agreement to the change is thus also being sought from the four downtown hospitals that between them appoint two of the ten directors, and from the University of Toronto, which also appoints two directors. The remaining two directors are appointed by the provincial government itself.

In order for an amendment to Bill 35 to be accepted, agreement from TDHC's stakeholders must be secured during the next few weeks. Thus the request is that City Council provide its endorsement at its meeting of October 1-2, 1998. Another opportunity to change the status of TDHC may not arise for several years.

Most of the balance of this document provides supporting information for this request to City Council. It provides a brief account of TDHC and its history, with particular reference to the relationship between TDHC and the City of Toronto. It sets out the environmental and economic benefits of district heating and district cooling. It describes the proposed change in corporate status, the reasons for it and the benefits to TDHC, the City of Toronto, and the community-at-large that will result from the change. It also describes the role of the proposed shareholders' agreement, which will ensure fairness in the allocation of the new corporation's equity and set out how the corporation will function. A concluding section sets out the three recommendations TDHC would like City Council to adopt. Appendix A provides a brief history of TDHC. Appendix B sets out the proposed amendments to Bill 35. Appendix C summarizes investment opportunities that TDHC cannot capitalize on in its present form.

TDHC and its History

The main business of TDHC is providing steam heat to more than 100 major buildings in downtown Toronto. These include Toronto City Hall, Metro Hall, the Queen's Park complex, four hospitals, and numerous major private-sector buildings such as the Toronto-Dominion Centre and the Royal York Hotel. Steam is provided from three plants located on Walton Street (the main plant), on Pearl Street, and within the Queen's Park complex.

The plants are normally fueled by natural gas (TDHC is Toronto's largest user), but the contracts provide for interruption of supply in periods of very high demand, typically for a total of no more than twelve days each winter. Then the two largest plants are fueled by low-sulphur oil. Back-up generators provide power for the plants' control systems when the electricity supply is interrupted. The most significant feature of the operation of TDHC's district heating system is that no customer has ever experienced an unplanned interruption of steam supply.

Another significant feature of TDHC's recent history is that steam sales have risen by more than 30 per cent since 1993 (see Chart 1) even though few buildings have been completed in the downtown during this period. Increasingly, building operators are choosing to purchase steam rather than operate their own plants, especially when plant replacement is required. A large new boiler was installed at the Walton Street plant in 1996 to ensure the 25-per-cent margin of capacity over demand considered essential for totally reliable operation.

Insert Table/Map No. 1

annual steam sales

A small but rapidly growing part of TDHC's business is district cooling, which involves the production and sale of chilled water for building air conditioning. The chilled water is produced using environmentally benign, steam-driven absorption chillers at a plant located within the extension to the Metro Toronto Convention Centre and provided to the Convention Centre itself and to the Air Canada building (Raptors Stadium). The chilled water system is being extended along York Street into the downtown business district. As well, some customers distant from this system use TDHC steam to drive their own absorption chillers.

As the history in Appendix A explains, centralized heating systems in downtown Toronto long antedate the formation of TDHC in 1982. The main points to be drawn from the historical survey are these:

The City of Toronto's initiative in forming TDHC was a farsighted response to several environmental and other challenges facing downtown Toronto in the 1960s and 1970s.

Although TDHC was formed at the initiative of the former City of Toronto, the City does not own TDHC or have control over it except through its minority representation on TDHC's board of directors.

Other parties to the formation of TDHC, notably the hospitals and the provincial government, have strong stakes in the corporation and strong claims to its assets and to being participants in the control of the corporation.

In order to address many environmental problems and to remedy some land-use planning errors, the City of Toronto made a large investment during the 1970s in some of the infrastructure now used by TDHC, an investment compounded by unreasonable construction delays and high inflation. The City still owns this infrastructure.

An agreement between the City and TDHC--reached in 1984 with an amendment in 1986--sets out the financial arrangements in respect of the use of the infrastructure. The agreement acknowledged the need for TDHC to contribute towards retiring the debt incurred by the City for the infrastructure, even though the debt that had been incurred before TDHC was formed. The agreement stated that TDHC's obligation could be discharged in full by making prescribed annual payments to the City: $725,000.00 a year to 2001 and then $1,239,000.00 a year until the City's debt had been retired.

The Benefits of District Heating and Cooling

Unless waste heat or cogenerated heat is used (see below) the environmental advantages of district heating arise because a large central plant is usually much better managed than smaller plants within individual buildings. Energy is used more efficiently within a central plant, enough to offset distribution losses. As important, there is more effective control over emissions from a large plant. Emissions of nitrogen oxides, for example, which contribute to smog, have been shown to be as much as 90 per cent less from the Walton Street plant per unit of heat produced than from on-site plants.

The major environmental advantage of district heating systems, not well exploited in Toronto, is that they allow for the productive use of waste energy or other low-grade energy that might otherwise not be used. The natural companion for district heating is electricity generation, which produces large amounts of otherwise wasted heat. Electricity generation may become necessary in downtown Toronto chiefly because of Ontario Hydro's insufficient transmission capacity for the downtown, but also because of potential province-wide shortages in generating capacity. Cogeneration of electric power and steam for district heating provides for highly efficient use of energy and should be a priority for a restructured TDHC and partners such as Toronto Hydro when electric power production in Ontario is deregulated in 2000.

There are also economic advantages to district heating. The major advantage is that a properly managed system produces heat for buildings at a lower cost than building operators can produce it themselves. This reduces costs for building operators who purchase steam, and allows them to focus on their core business. By reducing energy consumption and by use of locally available waste heat or cogenerated heat, where available, a district heating system helps reduce imports of energy into a business district. Together these various factors help strengthen the economy of an area served by a district heating system.

District cooling is a relatively new phenomenon, prompted by two factors. One is the huge and growing demand for cooling within modern large buildings, caused by growth in the use of heat-producing office equipment and trends towards more intensive occupancy of buildings, i.e., more warm bodies per square foot. The other factor is growing difficulty in the provision of on-site cooling posed by current and proposed bans on the main chemicals used as refrigerants (i.e., CFCs, HCFCs, etc.). Large modern buildings in Toronto typically require heating for no more than 180 days a year; at least one building requires no additional heating at all beyond what is provided by lighting, office equipment, and human bodies. By contrast, these buildings all require at least some cooling for 365 days a year to offset heat build-up in their cores.

There are even greater potential environmental and economic benefits from district cooling, especially in Toronto. There are the same kind of efficiencies from centralized operation of district cooling as occur with district heating. There is the already noted avoidance of use of chemicals that destroy the stratospheric ozone layer (e.g., CFCs). Another advantage is avoidance of the increases in ambient temperature, humidity, and noise that occur outside buildings that have on-site chillers, largely on account of their fans and cooling towers. Areas served by district cooling have a much more agreeable outdoor climate. But the greatest environmental and economic advantage, specific to Toronto, lies in the opportunity for Deep Lake Water Cooling.

The most exciting feature of TDHC's district cooling system is the plan to make use of the huge reservoir of cold water at the bottom of Lake Ontario. The lake is more than 250 metres deep in places. Below about 70 metres, reached within five kilometres of downtown Toronto, the water is permanently at 4-5șC. This is the result of a natural phenomenon present in all large deep bodies of water where winters are cold. Surface water sinks when it is cooled to just above the freezing point because this is when water is at its most dense. Summer warming penetrates only to about a 60-metre depth. Thus, a deep lake such as Lake Ontario has within it a very large volume of naturally cold water that is completely renewed each winter.

Deep Lake Water Cooling (DLWC) involves pumping the cold water ashore and using it to chill the water in a district cooling system. The major environmental and economic benefits of DLWC arise because pumping cold water in from the lake requires only about one tenth of the energy required to produce the same amount of very cold water using conventional chillers. The adverse environmental impacts are negligible.

Moreover, a relatively low-cost method of implementing DLWC has been devised, involving a partnership with the Water Division of the City of Toronto. TDHC will construct a new, extended intake for the Toronto Island treatment plant so that 4-5șC water can be pumped ashore by the John Street Pumping Station. After treatment and before entering the network of municipal water mains, the very cold water will be diverted to TDHC's district cooling plant in the Metro Convention Centre. There heat exchangers will transfer the 'cold' in the municipal water to the water in the district cooling system, thus raising the municipal water to just under its normal temperature before it enters the mains. Several levels of security will ensure no possible contamination of the municipal supply, which will always remain under the complete control of the City's Water Division.

The emerging DLWC arrangement has the potential to meet more than half the annual cooling demand for the whole of Toronto's downtown, and about a fifth of the peak demand. The chilled water will cost less to produce than by conventional means, but the overwhelming advantages are environmental. For each unit of cooling replaced by DLWC, fossil fuel use will be cut by as much as 90 per cent; moreover, the use of environmentally damaging coolants will be reduced. As noted, the downtown will be quieter and less humid in summer because there will be no need for noisy chillers or vapour-producing cooling towers, which can also be a source of bacterial contamination and cause a form of pneumonia known as Legionnaires' disease.

The reduction in fossil fuel use is especially important with the recent shutdowns of nuclear generating capacity in Ontario and the consequent increase in the use of coal-fired plants by Ontario Hydro. This additional use of coal has increased the pollution from electricity generation in Ontario by as much as 50 per cent during 1998, compared with 1997.

DLWC will also help with another problem experienced in 1998: unsatisfactory taste and odour resulting from growth of otherwise harmless algae. The water at a depth of 70 metres is uncommonly pure and free from algae. Indeed, its purity is such that fewer chemicals will be required for treatment, thus reducing the City's purification costs.

The DLWC project of TDHC and the City has received environmental assessment approval from the provincial government. A recent feasibility study confirmed the continued viability of the project. Detailed engineering design work has been commissioned. What must be put in place are the funds required to implement the project. It is an attractive investment. Several potential private-sector and institutional investors have indicated an interest in investing in the project. However, existing legislation severely limits investments in TDHC. The kinds of funds needed for DLWC are not likely to be forthcoming until TDHC's corporate status is changed.

Indeed, the present restrictions on investment severely limit any expansion of TDHC's system, and thus serve to prevent progress with many activities that could be of great benefit to the City's environmental and economic health. As well as implementation of DLWC, the present legislation hinders the natural expansion of district heating and district cooling within the downtown by making it difficult for TDHC to pay its share of connections with potential customers. The limited availability of capital, if it continues, will be an obstacle to the implementation of numerous cogeneration projects that will serve to stabilize the electric power supply to the downtown and reduce energy costs. What is needed to break the impasse is a change in the corporate status of TDHC, which is discussed below.

The Proposed Changes in the Corporate Status of TDHC

The main purposes of the proposed changes are to clarify the ownership of TDHC, to facilitate private- and public-sector investment in TDHC, and to allow TDHC to act in a more entrepreneurial manner in an increasingly competitive marketplace.

To provide for these changes while leaving the basic structure of TDHC and its relationships to its stakeholders intact, what is proposed is a simple set of amendments to the Energy Competition Act, 1998 (Bill 35). A copy of the proposed amendments is attached as Appendix B. What these amendments do, in effect, is transfer TDHC's governing legislative framework from The Toronto District Heating Corporation Act to the Business Corporations Act, leaving in place some of the special protections of stakeholders afforded by the former Act. In addition, the City is given the power to hold and sell shares in TDHC.

Continuation of TDHC under the Business Corporations Act will not affect any of TDHC's existing assets, liabilities or contractual arrangements. In order to distinguish the corporation with share capital from the one without share capital, a name change is proposed: to the Toronto District Energy Corporation (TDEC).

Ownership of the shares in TDEC will be set in the proportion of the current representation of stakeholders on TDHC's board of directors, i.e., City of Toronto-40 percent; Hospitals-20 percent; University of Toronto-20 percent; Government of Ontario-20 percent. The present legislation provides that TDHC is a corporation without share capital and is thus silent on the matter of ownership.

The stakeholders have made different contributions to TDHC over the years; in particular, the City and the hospitals have contributed proportionately more than the other partners. Adjustments will have to be made to ensure that the proposed allocation of control and equity is fair in light of these contributions. The essential steps in this process are already under way. They are (i) independent valuation of the corporation, and (ii) independent assessment of the value of the contributions made by the stakeholders to the corporation. This work is being done by Kattner/FVB (engineers with much expertise in district energy systems), assisted by ScotiaMcleod on financial issues.

When the necessary information is available, the resulting adjustments, and other features of the functioning of the TDEC, will form the basis of a shareholders' agreement to be negotiated after third reading of Bill 35. The Minister is being asked to undertake that the relevant sections of the Bill will not be proclaimed into law until there is a shareholders' agreement in place that is acceptable to each one of the principal stakeholders, namely the City, the four hospitals, the University of Toronto, and the provincial government.

An example of the kind of adjustment mechanism that might be discussed while negotiating the shareholders' agreement is set out in Table 1. It must be stressed that the numbers in Table 1 are hypothetical and are used here for the purpose of illustration only. The aim of the process of adjustment is to bring the stakeholders' contributions to the TDHC to the same proportions as their shares in the equity of the TDEC. In the example, this is involves a contribution by the University of Toronto of $5 million each to the City of Toronto and the hospitals. These are not necessarily the actual amounts that will change hands as a result of the adjustment process.

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Table 1 - Hypothetical example of adjustment mechanisms

A case can be made, even with the proposed provision for adjustments, that the present representation on TDHC Board is not the best basis for allocation of equity and control. The reality, however, is that every alternative is more controversial. Any variation from what is proposed here will likely be opposed by more than one stakeholder. The proposed allocation has the advantage that it is has the justification of current legislation, and it may well be the only one on which timely agreement can be secured.

Once the provisions of Bill 35 concerning TDHC are proclaimed, the shareholders will be free to sell or assign their shares to any party, subject to restrictions that may be contained in the shareholders' agreement. Thus, what is proposed here makes it possible for the City to decide, at a later date, to assign or sell all or some of its shares--to Toronto Hydro or to another interest. The City would also be able to purchase shares and thus increase its stake in TDHC.

It is noteworthy that upon Bill 35 becoming law the City of Toronto will have two years within which to transfer Toronto Hydro to a corporation incorporated under the Business Corporations Act. The City will initially be the sole shareholder. Continuing TDHC as a corporation incorporated under the Business Corporations Act meets the same legislative objective, namely to put the corporation on a commercial footing so that it is better able to compete in the new competitive energy markets in Ontario and elsewhere.

Presently, only the City of Toronto may lend money to TDHC for capital purposes. None has been lent. Instead, expansions of district heating and cooling have been financed out of current revenue, by selling accounts receivable or by capital leasing. These substitutes for regular investment all come with severe limitations: they contribute very little (current revenue) or they involve high costs. None of them is appropriate for the present scale of investment opportunities available to TDHC. Appendix C shows that as well the $83 million required for DLWC a total of $14 million is required for early improvement to the steam system that will enable the connection of additional customers, enhance efficiency overall, and reduce environmental impacts even further.

There is an urgent need for major investment. If TDHC were operating with share capital under the Business Corporations Act it would be in a position to accommodate investments from a variety of sources. TDEC would also have much greater leeway to enter into appropriate partnerships, for example with a restructured Toronto Hydro in the matter of cogeneration facilities.

Paramount in any restructuring must be protection of the City's investment and the public interest. Present arrangements provide no means for the City to recoup its investment in TDHC beyond the previously noted annual payments. The proposed changes will allow more of the earlier investment to be recovered. They will also provide a strong vehicle for the attainment of the numerous environmental and economic objectives of the City that are coincident with the advantages of district heating and district cooling set out above.

In the meantime, the City may well want to help rationalize the assessment of its contribution to TDHC by accepting a lump-sum settlement in lieu of the annual payments by TDHC provided for in the 1984-1986 agreement, as noted above. TDHC would be pleased to facilitate such a settlement in a timely manner using the services of a reputable financial organization.

Finally, it must be stressed that the matter of the shareholders' agreement will be critical under what is proposed, as will a commitment of the Minister to proclaim the sections of the Bill 35 pertaining to TDHC only when agreement among the proposed shareholders is reached. This will give the City, and each of the other stakeholders, a veto over the proposed changes. As a precaution, the City may wish to indicate that its agreement with the proposed amendments to Bill 35 is made on the understanding that the amendments will not become law until a shareholders' agreement satisfactory to the City has been reached. One of the three suggested recommendations at the end of this document provides expression of that precaution.

Expansion in and Beyond Downtown Toronto

There are extraordinary opportunities for the expansion of district energy in and near downtown Toronto, with consequent major reductions in the environmental impacts that presently result from heating and cooling buildings. These opportunities will be heightened when electric power generation is deregulated and widespread cogeneration becomes viable. The continuation of TDHC under the Business Corporations Act in the manner proposed here is a necessary condition for TDHC to be able to take advantage of these opportunities.

Several areas beyond the downtown could qualify for district energy systems, notably those that include the civic centres of the former local municipalities and other areas where there are concentrations of large buildings, whether commercial or residential or both. Where lower-cost sources of energy are available, district energy systems can be extended to lower-density areas. There are several potential low-cost sources of energy. These include the waste heat from the Pickering and Lakeshore electricity generating stations (now used mostly to warm Lake Ontario) and waste heat from industrial operations. As well, large-scale DLWC systems could be developed in conjunction with the City's three other water treatment facilities.

The proposed changes will also make it possible for TDHC, working with Toronto Hydro and other parties, to export its services and expertise to other parts of Canada and abroad. TDHC is recognized as among the most efficiently managed district energy systems in the world. Its growing expertise in the use of renewable energy for cooling will make it even more sought after.

Conclusions and Recommendations:

The progress of TDHC over the last 16 years can be a source of great pride to those in the City of Toronto who initiated it. TDHC's existence has reduced energy use and air pollution in downtown Toronto and contributed to the downtown's economic advancement. TDHC's progress and the changing realities of energy markets mean that TDHC has outgrown its original governing legislation. Changes are necessary that will make the corporation more entrepreneurial and more able to secure needed capital.

There is a very limited "window of opportunity" to secure the necessary legislative changes through a third reading amendment to Bill 35. This opportunity should be seized. For this to occur, City Council must give its assent to the proposed change on October 1-2. In particular, Council is urged to adopt the following recommendations:

(1)That agreement be given to the request by TDHC that Bill 35 (the Energy Competition Act, 1998) be amended to provide that the corporation be continued as a corporation with share capital under the Business Corporations Act (Ontario).

(2)That Council indicate to the Ministers of Municipal Affairs and Energy, Science and Technology that its agreement to the proposed amendments to Bill 35 is provided on the understanding that the sections of Bill 35 will not be proclaimed into law until agreement has been reached among all of the proposed shareholders as to a fair and equitable balancing of the contributions to and interests in the corporation, and as to such other matters as the shareholders consider to be suitable for inclusion in a shareholders' agreement.

(3)That the Chief Administrative Officer be authorized to negotiate a shareholders' agreement of the kind contemplated above.

(Copies of the Appendices A, B and C appended to the foregoing report, were circulated to all Members of Council with the agenda of the Strategic Policies and Priorities for its meeting of September 24, 1998, and copies thereof are on file in the office of the City Clerk).